The HSBC Purchasing Manager's Index (PMI) released Monday showed that China's services activity improved in September after the fall in August.

The services PMI rose to 54.3 in September up from 52 in August, indicating an improvement in the business activity. The index continues to remain in the area of expansion since the reading is above 50. Also the rise in the reading would decrease fears of the likelihood of a sharp slowdown in the economy.

“Service sector growth picked up in September thanks to rising new business flows. This is likely an indication of a gradual improvement of domestic economic conditions due to the earlier easing measures and the stronger consumption demand in the run-up to the Golden week holiday. While this helped to cushion the ongoing slowdown of manufacturing sectors, a meaningful turnaround in domestic demand requires additional easing efforts,” said Hongbin Qu, chief economist for China and co-head of Asian Economic Research at HSBC.

This comes after it was reported last week that China's manufacturing activity in September continued to remain in the phase of contraction. The data released Monday by the China Federation of Logistics & Purchasing showed that the manufacturing PMI rose to 49.8 in September, up from 49.2 in August. The continued shrinking of the manufacturing activity would increase fears of the likelihood of a sharp retardation in the economy.

There have been fears of a hard landing after data showed in July that China's economy slowed down to 7.6 percent in the second quarter, down from 8.1 percent in the first quarter. Beijing is targeting a growth rate of 7.5 percent this year. In 2011 and 2010, the economy grew 9.2 percent and 10.4 percent respectively.

“When asked about the prospects for activity at their units over the coming year, service providers in China signaled the highest degree of confidence since June,” Markit Economics said in a note.

While manufacturing activity continues to be affected, the growth in the service sector has helped drive the overall business environment.